Tuesday, December 6, 2016

Foreign Exchange: "You Can Almost Hear a Pin Drop"

The US dollar index is up 0.24 at 100.35.
Here's the one-year chart from FinViz:

From Marc to Market:

The foreign exchange market is quiet. Ranges are narrow, with
the US dollar mostly consolidating against the major currencies. Given
the push lower yesterday, the shallowness of its recovery warns of the greenback's downside correction after
strong gains last month may not be complete.

The news stream lends itself to consolidation. The immediate
angst over Italy has calmed. Many new reports insist on calling the
defeat of the referendum as a victory for
anti-establishment forces. We demur, and note that the opposition,
nearly 60%, was only partly explained by the populist-nationalist forces, but
the opposition to it was obviously widespread including in area in which the
5-Star Movement is not particularly strong.

Moreover, as it turns out, Renzi will stay on until at least the passage
of the 2017 budget, which could happen toward the end of the week. It
is possible that after the Italian President looks around for the best person
to head up the government, Renzi is it. One indication that this will not
happen is if Renzi also resigns as head of the PD.

At the same time, it looks like
investors are coming around to a less apocalyptic understanding of Italian
developments. To wit: bank
shares have recouped yesterday's loss and are up about 2.6% near midday in
Milan after falling 2.2% yesterday. Italian sovereign bond has also
recovered. Yesterday the 10-day yield rose eight bp. Today it is off six
bp. What this means is that over the past week, the benchmark 10-year
yield is down almost three bp, while
Spain's is off two bp and Germany is up
12 bp. A similar story is evident in the equity market. Italian
equities underperformed yesterday but are leading the way higher today with a
1.4% gain. Over the past week, the FTSE-MIB is up 4.4%, the most among not
just major European markets but the G7 as well by a couple of
magnitudes.

Monte Paschi successfully swapped about 20% of its subordinated notes for
equity. The next step is to secure new capital by anchor investors,
like Qatar. After that is the challenge
of raising capital by issuing more stock. There is some risk that even if
it can do this, which is not sure thing
(which is also why there is still talk of precautionary state aid), it may
satiate the market for this type of risk asset even though other large Italian
banks are also looking to raise capital. There is also some talk
that the bank may move away from its non-performing loan disposal, which might
not sit well with potential
investors.